Bay Area Home Price Appreciation Has Accelerated Again

Last year, Bay area home price growth had slowed.  In addition, it seemed that the limits on mortgage interest and SALT deductions in the new tax law combined with higher mortgage rates would bite harder in the high-priced Bay Area.  Thus, I felt home value appreciation would slow down further if not flatten out in the Bay Area.

It appears I was wrong.  Check out this graph of SF home values as measured by the Case-Shiller Index (from MarketWatch).  Bay area home values are growing at a 10%+ annual rate while other areas have slowed.  Median home prices show the same trend.



What explains this rebound?  The tax law certainly had plenty of benefits for high-income Bay Area residents, so perhaps the gain to their overall after tax income fueled demand more than the loss of tax deductions.  And speaking of income, Bay Area wages continue to grow at super fast rates.  The latest QCEW data shows annual wage gains of about 10% in Bay Area counties.  With housing scarce in the area, it is natural that area residents would spend some of those gains on housing, and incomes have grown proportionally with the housing costs.

For a few years (2016, 2017), Valley housing costs were rising faster than the Bay Area, narrowing the gap.  Now it appears that the housing cost differential between the Bay Area and inland areas is widening again which along with rising mortgage rates, increases the incentive for middle class households to migrate inland. 

New WaterFix Economic Analysis is Even Worse Than I Originally Thought

It turns out my initial reaction to the Brattle Group's latest WaterFix benefit-cost analysis was too nice.  I am receiving feedback that the sea-level rise analysis that the Department of Water Resources' touts as "innovative" assumes WaterFix is operated in ways that harm fish, would violate state and federal laws, and contradicts the commitments that DWR is making about WaterFix to the State Water Resources Control Board and other regulatory bodies.  My quick take didn't mention any of these important fish or legal issues.  

This quote from the Brattle/Sunding report explains its justification for estimating an enormous new sea-level rise benefit from WaterFix.

"DWR modeling indicates that Delta exports are highly sensitive with respect to sea level rise. A rise in sea level means more salinity intrusion from the ocean via the San Francisco Bay, affecting the water quality of exports and requiring more fresh water to be released from upstream reservoirs to meet salinity standards. By 2100, a 2-foot sea level rise becomes a more important contributor to reduced annual south-of-Delta export than does annual inflow change, a result also shown by Fleenor et al. (2008).  The DWR study published by Wang et al. (2011) concludes that sea level rise can be expected to reduce Delta exports by over 119,000 acre-feet annually by mid-century, and by over 520,000 acre-feet annually by 2100. Construction of the WaterFix would prevent these losses by giving water managers the capability to divert water directly from the Sacramento River upstream of the Delta.”

I asked several knowledgeable experts if this was legitimate and received a resounding "No."  Here is an example,

There is no reason to think that building the tunnels will allow a change in water quality standards.  Those standards protect fish and wildlife (the “X2 standards”) and in-Delta agricultural, municipal and industrial uses.  The studies Sunding relied upon (without any apparent understanding on his part of how they were done, what they mean and what their assumptions were) show that with expected sea level rise and assuming no islands flood and all channels get deeper—so they continue to be dredged to the same levels as they are now even though they don’t need to be—more outflow will be needed to meet the current water quality standards.  

Sunding assumes, quite incorrectly, that with the tunnels the extra outflow caused by sealevel rise can instead be pumped through the tunnels, which means the Delta gets saltier and the water quality standards won’t be met.  That would be a disaster for fish, wildlife and those in the Delta who rely upon it for water.  Assuming the water quality standards go away because the tunnels are built is either fantasyland or the worst fears of the in-Delta water users and enviros.  It means either Sunding has no clue about Delta water quality and the reason for those standards, or he and his clients think they can fool people into thinking this project works economically or he and his clients are completely disingenuous about their intentions once the tunnels are built.  So once again, Sunding’s assumptions are complete BS.

Yes, there is quite a track record of Brattle/Sunding making unjustified assumptions to increase the estimated benefits of the tunnels.  Every revision of the tunnels project has made its economics worse, but Brattle/Sunding just make another new assumption to push the benefit-cost ratio over the magic number of 1.

Summer 2012:  After the initial analysis of economic benefits of the Delta tunnels (water supply, water quality, and seismic risk reduction) falls far short of its costs, Sunding/Brattle unveil a new 4th category of benefits bigger than all the rest combined:  "the value of regulatory certainty."  The justification for the benefits are the regulatory assurances that are part of a habitat conservation plan under the ESA.  Critics call regulatory certainty a BS assumption.

Summer 2015:  DWR releases new EIR and revised tunnel plan that shifts from BDCP habitat conservation plan to tunnels only WaterFix.  The new EIR also has substantially lower water supply benefits compared to no action.  Both these changes substantially impact the economic benefits of the tunnels, and DWR promised a new economic analysis within months but never releases it.

Fall 2016:  The suppressed 2015 economic analysis comes out in a public records request.  In order to get a positive B-C ratio in this report, Brattle/Sunding assume away $6.5 billion in costs by assuming a massive, unjustified subsidy.  They also assume the water supply benefit of the tunnels are more than 5 times higher than estimated in the EIR/EIS by continuing to assume the tunnels are exempt from future regulations that are certain without the tunnels.

September 2018:  As the economics of the tunnels get worse, the ridiculous assumptions needed to generate a positive benefit-cost ratio get bigger too.  The analysis released last week embeds a number of inaccurate assumptions:

• Introduces unjustified $5.7 billion sea-level rise benefit discussed above which implicitly assumes WaterFix doesn't have to comply with Delta water quality standards.  Costs exceed benefits without this assumption.
• Implicitly assumes the No Tunnel Scenario complies with proposed Bay-Delta outflow requirements, but that the WaterFix scenario does not.  This unjustified assumption increases estimated water supply benefit to more than 6 times the level in the WaterFix EIR/EIS.
• Introduces a new multi-billion dollar cross subsidy from Metropolitan Water District ratepayers to the Central Valley Project in the form of a low "wheeling rate" for access to the tunnels' conveyance capacity.  
• Falsely claims that an analysis that is not statewide, and only narrowly focused on participating water agencies, is consistent with the DWR economic analysis guidelines.

Quick Reaction to the Latest WaterFix Economic Analysis

This afternoon, the Department of Water Resources released a new report from the Brattle Group, "Economic Analysis of the WaterFix: Benefits and Costs to Project Participants."  I gave it a quick review this afternoon, and judging by my inbox, there is high demand for instant analysis - so here it is.

This report is different in several respects from previous analysis of earlier versions of WaterFix by the same consultants.  These 4 points highlight this new information.  The 1st and 4th bullet points in this list are going to cause trouble for the Metropolitan Water District (MWD) in the recent Prop 13 and Prop 26 lawsuit filed against them.

• It assumes a massive new subsidy for agricultural users cost share from urban water users.  The agricultural subsidy is contained within a "wheeling rate" that it assumes that Metropolitan Water District (MWD) would charge the Central Valley Project (CVP) for using the tunnels' conveyance capacity.  To illustrate this, I used Table 2 and Table 6-7 in the report to calculate the % of water supply benefit and % of project costs for 3 groups, State Water Project Urban (which is mostly MWD), SWP Agricultural, and CVP (which is mostly farms).  

	SWP Urban	SWP Ag	CVP
% of Water Yield	44%	24%	32%
% of Costs	63-69%	14-19%	18%

(The % costs is a range because it is unclear whether table 6 or 7 is comparable to the water yield estimates in table 2.  Either way the urban to agriculture subsidy is clear.)

• The positive benefit-cost ratio depends on a dubious new benefit: the value of sea-level rise protection benefits.  The report estimates the present value of these sea-level rise benefits at a whopping $5.7 billion, a value that exceeds the study's estimated total net benefit of the WaterFix.  That means the benefit-cost ratio is negative for all user categories if this dubious new benefit is removed.  This estimated benefit has never been included in any previous study of WaterFix, and thus it is a new benefit category created for this report when the old methodology fell short of giving a postive benefit-cost ratio.  So how is it estimated?  They use a 2011 DWR report that estimates the water supply loss from maintaining Delta salinity standards under sea-level rise scenarios using the existing no-tunnel system.  Then it assumes that WaterFix eliminates 100% of that loss, which seems to assume that they won't have to meet the salinity standards if they can divert from the new intakes further upstream.  Thus, it seems that this benefit to WaterFix benefits comes at the cost of non-participants downstream from the north Delta intakes.  Those costs are not included in this analysis of benefits/costs, because it only looks at participants.  Furthermore, it is worth noting that the study from which these water supply benefits are calculated does not include any modeling of the Waterfix tunnels operation, and thus it is not clear that the WaterFix would/could prevent this loss.  Why didn't DWR model this with WaterFix?  Why use an old study and make this unjustified assumption?

• The report, press release and webpage falsely claim that this benefit-cost analysis is consistent with DWR's Economic Analysis Guidebook.  The Economic Analysis Guidebook clearly states that "Although economic analyses can be evaluated from many different perspectives (individuals, communities, etc.), DWR conducts these analyses from a statewide perspective."  The report is clear, even in its title, that it is an analysis from the perspective of water agencies that participate in WaterFix.  It does not consider statewide impacts - which include costs to other water users or the environment - both of which are very large for this project.  This is especially true if one uses the No Tunnel baseline used in this economic study which is extremely different than the No Tunnel baseline used in the environmental impact report and other regulatory documents.

• The single-tunnel scenario is clearly better for MWD and urban water users if one compares this study to a February 2018 analysis of single-tunnel by the same consulting firm.  While that single-tunnel report had many of the same problems as this one, it did not need to include a highly questionable estimate of over $5 billion in sea-level rise benefits to get a positive benefit-cost ratio.  Comparing these reports shows that financing the 2nd tunnel by MWD adds enormous costs for their ratepayers for little/no additional benefit.   

Serious problems with previous reports, especially the use of a deceptive no project baseline to artificially increase water supply benefits, are repeated in this report.  I have written about that extensively elsewhere and will not repeat it here.  I may amend this analysis later once I have time to review in more detail.

Should Scenario Planning for Bay Area Prosperity and Social Inclusion Include the Mega-Region?

The Bay Area urbanist think tank SPUR recently released a provocative report that lays out 4 future scenarios of the Bay Area in 2070.

Inland areas in Northern California only appear in 1 of the 4 scenarios, "Gated Utopia: Economic prosperity + Social Exclusion."  This is the first of 4 scenarios presented, and it SPUR seems to be suggesting that it is where current trends are taking us.  After a mostly positive description of life in the Bay Area in 2070, it turns to the North San Joaquin Valley.

"Outside the core of the region, it’s a different story. Service workers endure long, crowded commutes from a sprawling supercity in the northern San Joaquin Valley that encompasses the formerly separate cities of Tracy, Stockton, Manteca and Modesto. Among its neighborhoods of inexpensive single-family homes, the supercity includes a number of shantytowns and tent cities"

The most positive scenario that SPUR creates is called "A New Social Compact Economic Prosperity + Social Inclusion."  In it, Bay Area communities allow much greater housing densities, adapt to smaller living spaces, but enjoy broadly shared economic growth as the population grows beyond what anyone thought imaginable for the region.  Inland areas of Northern California are left out of this vision.

This is surprising to me, since SPUR was one of the first to write about the Northern California Megaregion concept in a 2007 report that influenced my thinking about Northern California not long after I moved to the region from the East Coast in 2008.

"Our perspective is that the megaregion approach will help create new middle-income opportunities that spread the prosperity of California to a broader range of households and communities. While the competitiveness of the coastal regions in the Northern California megaregion depends on our leading edge universities, entrepreneurs and an abundance of risk capital, the economic opportunities for the inland regions of the state will depend on building bridges to these innovative industries, particularly in manufacturing and other industries."

The 4 scenarios in the new SPUR report are designed to provoke discussion and debate, and it has. 

It's unfortunate that this new SPUR report suggests that the outcome of "economic prosperity + social inclusion" can only occur through a super-high density, urban vision with very high local taxes funding a local social inclusion agenda.  I believe there are alternative paths to the goal of economic prosperity and social inclusion that could be pursued at a larger mega-regional spatial scale, along the lines of SPUR's 2007 report.